Tambe, ACTG. C.J.
1. The petitioner, Messrs. Mahadeo Gangaprasad, is a partnership firm carrying on business in Bombay. By this petition under article 226 of the constitution of India, the petitioner seeks to get quashed the notices of demand of date 28th November, 1962, and the proceedings taken against the petitioner in pursuance thereof. The petitioner also seeks for an order against the Income-tax Officer, respondent hereto, prohibiting him or his successor in office from taking any steps or proceedings, in enforcement, furtherance, implementation or in pursuance of the said notices of demand. We are here concerned with assessment years 1956-57 to 1960-61. At all material times in the said assessment years one Bajranglal Birla was its partner, though there had been some changes during these years in respect of its partners and in respect of the shares of the partners. It is not necessary for the purpose of this case to go into any further detail.
2. The firm, at all material times, was a registered firm. In respect of these assessment years, assessments of the firm had been made for ascertaining the income of the firm and thereafter the respective shares of the partners in the profits of the firm had also been transferred to the individual assessments of the partners and have been taxed in their hands. Bajranglal's share of profits in the firm also had been taxed in all these assessment years in his hands. On 28 the November, 1962, the Second Income-tax Officer A-IV Ward, issued five notices in respect of the aforesaid assessment years claiming n an aggregate a sum of Rs. 2,09,788.43 paise, being the amount of tax recoverable from Bajranglal, one of the partners of the petitioner-firm in the relevant assessment years. It had been stated in the notices that the demand notices were issued under section 156 of the Income-tax Act, 1961 (43 of 1961), hereinafter referred to as the Act. Along with these notices the Income-tax Officer sent covering letter of the same date, the material part thereof reads :
'The above assessee (Shri Bajranglal Birla) is in arrears of income-tax amounting to Rs, 2,38,277-18. He was partner in your firm up to the assessment year 1961-62. The proportionate tax on the shares of income of the above partner in your firm is as follows :
Assessment year Proportionate taxRs. nP.1956-57 14,395.591957-58 2,051.121958-59 21,347.981959-60 1,28,121.501960-61 45,872.24----------------Total 2,09,788.43----------------- Steps taken to collect the arrears of tax due from the above partner have become fruitless as he has no assets to be proceeded against. In the circumstances the only alternative is to have recourse to the recovery of the taxes due from him from you under proviso (ii) to section 187(1) of the Income-tax Act, 1961.
I hereby call upon you under proviso (ii) to section 187(1) to pay the above sum of Rs, 2,09,788.43 nP. Notices under section 156 are enclosed for the assessment years 1956-57 to 1960-61.'
3. The petitioner-firm by its letter of 22nd December, 1962 wrote to the Income-tax Officer objecting to this demand of the payment of the aforesaid sum of Rs. 2,09,788.43. In its letter the petitioner-firm stated that the notices in question were bad and ineffective inasmuch as that demand could not be made unless it is backed up by an appropriate order; that proviso (ii) to section 187 of the Income-tax Act is not applicable to the assessment years 1956-57; that the covering letter of the Income-tax Officer does not show how the quantum of liability of Bajranglal sought to be fixed on the firm was arrived at; that the rate of tax applicable to the income of Bajranglal on the basis of his firm in respect of his share-income in the firm; that the demand made also includes tax on the share-income of Hariprasad, which the income-tax authorities were not competent to do. The petitioner-firm by the said letter then asked the income-tax authorities to let them know as to what attempts had been made by the income-tax authorities to recover from Bajranglal the next due from him. The petitioners then by their said letter requested that the proceedings be dropped and requested the Income-tax Officer to let them known as to whether he would like to drop the proceedings or otherwise they would take appropriate proceedings to safeguard their interests. By his reply dated 2nd January, 1963, the Income-tax Officer stated that he could not agree to drop the proceedings as requested by the petitioners and that tax demanded from them must be paid within the time mentioned in the notices. In this reply the Income-tax Officer admitted that the figures of tax noted in the covering letter of November 28, 1962, represented the proportionate tax on the share-income of Shri Bajranglal Birla including the share income of Shri Hariprasad Birla, who was held to be a benami of Shri Bajranglal Birla. By its letter of January 7, 1963, the petitioner-firm complained about the failure on the part of the Income-tax Officer to supply it with the necessary information and intimated to him that in view of the non-cooperative attitude adopted by him the petitioner will have no alternative but to move this court by writ petition and on the 14th day of January, 1963, the petitioner has filed this petition under article 226 of the Constitution of India, wherein he has prayed for the aforesaid reliefs, which in substance is quashing of the aforesaid five demand notices issued to it under section 156 of the Act.
4. The arguments advanced before us by the learned counsel for parties principally turn round the provisions of section 156 and section 187 of the Act and, therefore, in order to appreciate the arguments, it is necessary at this stage to read the material portion of the provisions thereof : section 187 occurs in Chapter XVI of the Act, which relates to the special provisions applicable to firms. Section 182 relates to the assessment of registered firms. Section 183 relates to the assessment of unregistered firms and sections 184 to 186 relate to the registration, and cancellation of registration of firm. Sub-section (1) of section 187 provides :
'Whether at the time of making an assessment under section 143 or section 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment :
Provided that -
(i) the income of the previous year shall, for the purposes of inclusion of the total income of the partners, be apportioned between the partners who, in such previous year, were entitled to receive the same ; and
(ii) when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment.'
5. Sub-section (2) defines what would constitute change in the constitution of the firm for the purpose of this section. It is not necessary to reproduce the said provisions. Section 156 runs as under :
'When any tax, interest, penalty, fine or any other sum (including annuity deposit referred to in Chapter XXII-A) is payable in consequence of any order passed under this Act, the Income-tax Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable.'
6. Mr. Mehta, learned counsel for the petitioner, raised four contentions before us. In the first instance he contended that there was nor constitution of the firm within the meaning of the Act at the time of the assessment for the assessment year 1956-57. According to Mr. Mehta, this assessment was made on 13th January, 1960, and at that time the firm had not been reconstituted and, therefore, the Income-tax Officer was not justified in demanding from the petitioner-firm any tax payable by Bajranglal in respect of his share income for that year. In the second instance Mr. Mehta contended that the tax demanded includes the tax payable in respect of the share income of Hariprasad, which has been included in the total income of his father, Bajranglal. There is however no averment that the tax could not be recovered from Hariprasad. The Income-tax Officer therefore, was not competent to include the tax payable in respect of the share income of Hariprasad from the petitioner-firm. Thirdly, it is contended by Mr. Mehta that the proportionate tax, which has been claimed from the petitioner-firm, is on the basis of the rate of tax at which Bajranglal had been taxed on his total income. According to Mr. Mehta and it is not disputed that in the relevant accounting year Bajranglal had income from other sources and his share income was clubbed together with the other income. The result was that the total income of Bajranglal had been taxed at a higher rate. According to Mr. Mehta the Income-tax Officer was not competent to claim the proportionate tax payable by Bajranglal in respect of his share income at a rate higher than the rate applicable to that part of his income only. Lastly, Mr. Mehta contended that at any rate there had been no order made determining the liability of the firm in respect of the tax payable by Bajranglal. It was, therefore, not within the competence of the Income-tax Officer, without making any order, to issue demand notices under section 156 of the Act.
7. Mr. Joshi, learned counsel for the revenue, on other hand, contended that on a true construction of sub-section (2) of section 187 of the Act, the firm had been reconstituted at the date of the assessment order for the year 1956-57 i.e., on the 13th January, 1960. The petitioner, therefore, was liable to pay tax in respect of that year also. Hariprasad, though he was shown as one of the partners in the deed of partnership, was not accepted as a partner of the firm in the proceedings for the registration of the firm. In those proceedings it was found that Hariprasad was merely a benamidar for Bajranglal and the person who was recognised as partner for the registration of the firm was only Bajranglal and not Hariprasad. The tax claimed in respect of the total share income of Bajranglal from the petitioner was, therefore, proper. It was next urged by Mr. Joshi that the rate at which tax was payable by Bajranglal in respect of his share income was the rate applicable to his total income and it is at that rate that the tax has been a assessed on Bajranglal. The petitioner-firm was, therefore, liable to pay proportionate tax at that rate in respect of the share income of Bajranglal, which could not be recovered from him. Lastly, it was contended that having regard to the scheme of the Act, it is not necessary for the Income-tax Officer to make any further order to on able him to give the aforesaid demand notices under section 156. The order of assessments made against Bajranglal in his individual assessment enabled the Income-tax Officer to give notice to the petitioner-firm under section 156 of the Act. Mr. Joshi in support of his argument has placed reliance on a decision in N. Subba Rao v. Third Income-tax Officer, Bangalore.
8. We will first proceed to decide the last contention. We have already reproduced section 156 of the Act. On a plain reading of the section it is apparent that there must be an order passed under the Act in consequence of which the amount of tax demanded is payable. The question to be considered is whether the assessment orders made by the Income-tax Officer in the individual assessment of Bajranglal would constitute an order within the meaning of section 156 enabling the respondent to issue the aforesaid demand notices or whether any further order was required to be made by the Income-tax Officer before issuing the demand notices. The contention of Mr. Joshi as already stated, is that the respective assessment orders in the case of Bajranglal's individual assessments enabled the Income-tax Officer to issue the aforesaid notices of demand. The argument advanced is founded on the provisions of section 182 and the definition of the word 'assessee' in section 2(7). Section 182 is a provision relating to the assessment of a registered firm. Sub-section (1) thereof provides :
'(1) Notwithstanding anything contained in sections 143 and 144 and subject to the provisions of sub-section (3), in the case of a registered firm, after assessing the total income of the firm, -
(i) the income-tax payable by the firm itself shall be determined; and
(ii) the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly.'
9. Sub-section (3) provides :
'When any of the partners of registered firm is a non-resident, the tax on his share in the income of the firm shall be assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally, and the tax so assessed shall be paid by firm.'
10. Section 2(7) provides :
''assessee' means a person by whom income-tax or super-tax or any other sum of money is payable under this Act, and includes every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person.'
11. We are here not concerned with sub-section (3) as admittedly all the partners of the firm are resident within the meaning of the Act. It is the argument of Mr. Joshi that having regard to the provisions of sub-section (1) of section 182 of the Act, the assessment of the firm and the assessment of the partners of the firm are the integral parts of an assessment as a whole. In respect of the income of the firm assessment proceedings had been taken and that makes the firm an 'assessee' within the meaning of section 2(7) of the Act. Under the scheme of the Act, the income of the firm is taxed in the hands of its partners and those assessment orders have also been made in the individual assessment of the various partners including the partner, Bajranglal, but nothing could be recovered from Bajaranglal. Therefore, by reason of the provisions of section 187 of the Act, the tax liability of Bajranglal has become recoverable from the firm. Under section 156, to enable the Income-tax Officer to serve a notice of demand, only two things are required : there must be an order in consequence of which a tax is payable and the person on whom notice of demand is served must be an assessee. There are assessment orders made against Bajranglal quantifying the tax liability. The demand notices have been served on the petitioner-firm, which is an assessee within the meaning of the Act. The requirements of section 156 are thus fulfilled and no further order is required because the liability of the petitioner-firm to pay that amount demanded arises from the provisions of section 187 of the Act. The argument, though on the face of it is attractive in our opinion, is not well-founded. It is indeed true that the assessment of a registered firm and its partners are connected with one another but none the less it is apparent from the provisions of section 182 itself that the orders made against the firm in its assessment and the orders made against the individual partners are distinct and separate orders though to a certain extent they might be inter-connected inasmuch as the assessment of the firms results in the determination of the total income of the firm and its division as amongst its partners and unless this is first done, the total income of an individual partner in his own assessment cannot be arrived at. But there the matter ends. The determination of the quantum of tax is in the light of the figure of the total income of an individual partner arrived at in accordance with the provisions of the Act. It is also clear that under the scheme of the Act, the initial liability to pay the tax in respect of the share income is that of a partner and not of the firm. The orders of assessment, which have been made in the individual assessments of Bajranglal. thus enable the Income-tax Officer to recover the tax from Bajranglal. Those orders by their own force do not enable the Income-tax Officer to demand proportionate tax in respect of the share income of Bajranglal from the firm. The assessment orders ex facie do not say so. Apart from it unless certain events or certain contingencies mentioned in section 187 occur or take place, the liability of the firm to pay the said amount of tax does not arise. It, therefore, cannot be said that in consequence of the assessment orders made in the individual assessment of Bajranglal the amount has become payable by the petitioner-firm. It is indeed true that the petitioner-firm was an assessee so far as the assessment of the firm is concerned. It is also true that the assessment of the firm and the assessment of the partners of the firm are inter-connected with one another. But it does not, therefore, necessarily follow that the petitioner-firm had also been an assessee in the individual assessment of Bajranglal. In respect of Bajranglal's individual assessment, the only assessee is Bajranglal and non else. The assessment orders, on which the revenue is relying, are the orders in the individual assessment of Bajranglal in which Bajranglal alone is the assessee and in consequence of the said orders the amount of tax has become payable by Bajraglal. It is true that the petitioner-firm is an assessee, as already stated, in its own assessment, but that does not lead to the conclusion that because the petitioner-firm had been that does not lead to the conclusion that because the petitioner-firm had been an assessee in its assessment, the petitioner firm has, by reason of that fact itself, become liable to play the tax liability in respect of the share income of Bajranglal. What gives rise to the liability of the petitioner-firm to pay the said tax is assessment of the tax on its partner, Bajranglal, and on the happening of the events mentioned in section l87 of the Act i.e. in ability of the revenue to recover tax liability from Bajranglal. What is required under section 156 is that an amount of tax must become payable in consequence of the order passed. Such a result is not obtaining here by reason of the assessment orders passed in the individual assessments of Bajranglal. Mr. Joshi, in support of his argument, has placed reliance on a decision reported as N. Subba Rao v. Third Income-tax Officer. Bangalore. The facts in that case were : A firm against who an order of assessment was passed was discontinued. Proceedings against one of its former partners for recovery of the tax assessed on the firm were started and notice of demand was issued to the partner under section 29 of the Indian Income-tax Act. The validity of the notice of demand was challenged by the partner, inter alia, on the ground that the notice of demand issued on the partner under section 29 not having been based on any order was bad. This contention was over-ruled by the learned judges. At page 811 it has been observed :
'Under section 44, the partners are made liable for the payment of the tax due from the firm which has discontinued its business. In such a case there need not be any separate assessment as against the partners. It is a vicarious liability that is cast on the partners. What is being collected is the tax due from the partners of the firm. The notice of demand is based on the order of assessment made against the firm. Before issuing a notice under section 29 their need not be necessarily an order of assessment on the person against whom the notice is issued.
12. Now, these observations of the learned judges indicate that what was contended was that a separate order of assessment as such was required to be made to make a partner liable to pay the tax, which had been assessed on the firm that had discontinued its business. If the observations only mean that a separate assessment order, as such, is not necessary, we respectfully agree. But if they mean that no order, at all quantifying the amount that is recoverable from a partner is required to be made after hearing the partner, then with utmost respect we find it difficult to agree. We have not stated that an order of assessment as such is required to be made against the firm. All that we have stated is that an order must be made after hearing the firm, deciding the contentions raised by the firm and quantifying the amount that is required to be recovered from the firm. The language of section 156 undoubtedly is more or less analogous to the language of section 29, which requires that there must be some order, which may be an assessment order or any other order, in consequence of which the amount of tax is payable by the person from whom the amount is claimed. There must be a direct connection between the order and the person from whom the amount of tax is demanded. To accept the argument of Mr. Joshi, we will have to read something much more than what section 156 provides. It is for these reasons that, in our opinion, a further order determining and quantifying the liability of the firm under section 187 of the Act is required to be made before a notice of demand under section 156 is given. The view taken by us is also in consonance with the principles of natural justice. We have already reproduced section 187 of the Act. The second proviso undoubtedly makes a firm liable to pay the tax assessed upon a partner in respect of his share income, but it is to be notice that, to attract the provisions of this section, there are certain things which are required to be established. Firstly, it must established that at the time of the assessment a change in the constitution of the firm had taken place. The second thing that is required to be established is that the tax assessed upon a partner cannot be recovered from him. It is only when these two facts are established that the Income-tax Officer becomes entitled to recover from a firm the unrecovered tax assessed on its partner in respect of his share income. The firm could, before it is called upon to pay, legitimately claim an opportunity to show that there had been no reconstitution of the firm at the time the assessment of the firm was made or that tax assessed on its partner could be recovered from him. It can hardly be disputed that a proper opportunity should be afforded to the firm to put forward its case and after hearing the firm the matter should be decided in a judicial manner.
13. Mr. Joshi contended that the Income-tax Officer knows from the record of the case whether the firm had been reconstituted or not at the time assessments were made. The Income-tax Officer also knows what was the amount of tax determined in the individual assessment of the partners ; what amount has been recovered and what amount has remained yet to be recovered. The answer is merely an arithmetical calculation.
14. We are not inclined to accept this argument. Whether a firm has been reconstituted or not at the material time will have to be determined on the facts and in the light of the provisions of sub-section (2) of section 187 of the Act. It may be true that the Income-tax Officer may be able to say what amount of the assessed tax has remained unrecovered from a partner but, in our opinion, the second proviso requires something more than that. What is required to be established is the tax which could not be recovered from a partners. It is something different from a tax which is not recovered from a partners. What is required to be established is that it was not possible to recover the tax from a partner and not that the tax was not recovered from the partner. It is not disputed that the notice of demand has been issued to the petitioner-firm without giving an opportunity of being heard and without determining the contentions which it has raised. As pointed out above, the petitioner had raised a contention in its reply that the firm was not reconstituted at the time the assessment order in respect of the assessment year 1956-57 was made. The petitioner had also contested as to the quantum of the tax that had remained to be recovered from the assessee. All these were questions of fact and they had not been gone into by the income-tax authorities.
15. Mr. Mehta, during the course of the arguments, conceded that the firm had been reconstituted at the time the assessment order in respect of the assessment year 1956-57 was made. There is, therefore, no dispute now remaining as regards the fulfillment of the conditions mentioned in section 187 of the Act.
16. As regards the petitioner's contention that the tax payable in respect of the share-income of Hariprasad has been demanded from the petitioner-firm, the contention of the department before us is that Hariprasad being a benamidar for Bajranglal, the income earned by Hariprasad was really the income of Bajranglal and, therefore, it was Bajranglal, who was liable to pay tax on it and the tax was, therefore, assessed on him. This is a disputed questions of fact and will have to be decided after an enquiry.
17. As regards the contention about the rate at which proportionate tax 'assessed' in respect of the share-income of the individual partner could be recovered from the firm, in our opinion, the contention raised n behalf of the revenue is well-founded. The language of the second proviso shows that if the conditions mentioned in section 187 are fulfilled, the tax 'assessed' on a partner is made recoverable from the firm 'when the said tax cannot be recovered from the partner'. Thus, what is made recoverable from the firm is the tax assessed on a partner in respect of his share-income, which could not be recovered from him. We have already referred to the scheme of the Act and shown that in the case of a registered firm a partner's share income is taken into account in his individual assessment and the tax is levied on his total income as determined in accordance with law. It may be that in certain cases the partner has other income. In that event, the other income clubbed together with his share-income may result in his being taxed at a higher rate, but it is at that higher rate that the tax is assessed on a partner. It may be, in a given case, that in respect of the other sources there is a loss. The loss would then get deducted from the share-income of the partner and the result in certain cases may be that the partner gets taxed at a much lower rate than he would have been taxed if only his share-income had been taxed. Whatever be the position, the Act provides that the tax assessed on a partner, when it cannot be recovered from the partner, when it cannot be recovered from the partner, is made recoverable from the firm. It may be that the tax is assessed on the partner at a higher rate on the share-income or it may be that the tax is levied at a rate lower than the rate applicable to it, but on the language of the section it is clear that whatever be the tax assessed on the total income of the partner, if that tax cannot be recovered from him, the revenue is entitled to recover the proportionate tax in respect of the share-income from the firm irrespective of the rate at which his share-income by itself would have been taxed. If Mr. Mehta's contention is accepted, we will have to read the second proviso in the following manner : 'When the tax assessed upon a partner cannot be recovered from him, the tax calculated on his share-income at a rate applicable thereto shall be recovered from the firm as constituted at the time of making the assessment.' This would amount to rewriting of the second proviso and not construing the second proviso. It is for these reasons that we are unable to accept Mr. Mehta's contention.
18. It is for these reasons that, in our opinion, the petition will have to be allowed and the matter will have to go back to the Income-tax Officer for being dealt with in accordance with law.
19. In the result the rule is made absolute. The aforesaid five notices of demanded are quashed. There will be no order as to costs.
20. Petition allowed.